After graduation from business school, Pete wanted to start a new business. In competition with another firm, he became involved in developing a new technology that would allow consumers to sample food over the Internet. Given the newness of this market, technological compatibility across firms is important. Pete's firm, DigiOdor, is far advanced in developing its Sniff technology. His competitor, WebTaste, has been working on an incompatible technology, Smell. If they both adopt the same technology, Sniff or Smell, they each may gross $150 million from the developing industry. If they adopt different technologies, consumers will later decide to purchase neither product, leading to gross sales of $0 each. In addition to the above considerations, switching over to the other technology would cost WebTaste $100 million right away and DigiOdor $250 million. In other words, WebTaste would incur additional costs of $100 million if it switched to Sniff technology, and DigiOdor would incur additional costs of $250 million in switching to the Smell technology. The firms will simultaneously make their technology adoption decisions.

What is the equilibrium outcome (check one)? Also, please explain your answer below, indicating the payoffs received by DigiOdor as well as WebTaste.

Both adopt Sniff

Both adopt Smell

DigiOdor adopts Sniffand WebTaste adopts Smell

WebTaste adopts Sniffand DigiOdor adopts Smell